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IAI Actuarial Core Principles · Business Economics · Relationship between the government and the individual firm

A competition authority is reviewing a proposed merger between two large private banks in the same city. Which measure is most directly used to judge whether the merger would significantly raise market concentration?

The change in the Herfindahl-Hirschman Index is used. It sums the squared market shares of firms, so it shows how much a merger raises concentration. Inflation, reserve ratios, tax rates and the current account do not measure market concentration.

  1. AThe change in the Herfindahl-Hirschman Index of market sharesCorrect
  2. BThe current account balance of the banking sector
  3. CThe inflation rate in the city
  4. DThe reserve ratio set by the central bank
  5. The average tax rate paid by the two banks

Explanation

Competition authorities assess mergers by looking at market structure. The Herfindahl-Hirschman Index sums squared market shares, so a merger of two firms raises it by twice the product of their shares. The other options are macroeconomic or fiscal variables that do not measure concentration.

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